January 12, 2000


Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Release Nos. 34-42009; IA-1845; File No. S7-25-99; Certain Broker-Dealers Deemed Not To Be Investment Advisers

Dear Mr. Katz:

The Investment Counsel Association of America1 appreciates the opportunity to provide these comments regarding the Commission's proposed rule that addresses the application of the Investment Advisers Act of 1940 (Advisers Act) to broker-dealers who offer their customers full service brokerage, including advice, for an asset-based fee instead of or in addition to traditional commissions, mark-ups, and mark-downs.2

The proposed rule involves important issues that require careful and serious deliberation. The heart of the rule, in effect, redefines statutory terms that have marked the legal distinctions between broker-dealers and investment advisers for several decades. The rule is particularly significant because it will provide guidance to the brokerage industry, the investment advisory profession, investors, and regulators concerning the circumstances and activities that will subject brokerage accounts to the laws and regulations governing investment advisers.

While the ICAA agrees that a rule is needed in this area, we are not convinced that the proposed rule gives appropriate and definitive guidance. The test employs three concepts: (1) the exercise of investment discretion (2) which is "solely incidental" to the broker's primary business; and (3) the broker employs a disclaimer in advertising. With respect to the first concept, we believe that if an account bears the fundamental characteristics of an advisory account - or if it is marketed as such - it should be subject to the provisions of the Advisers Act. These fundamental characteristics include more than discretion. With respect to the second concept, the Commission does not provide adequate guidance regarding the meaning of "solely incidental," but at a minimum it cannot include discretionary services. Finally, the brief advertising disclaimer proposed in the rule would not achieve its intended goal of reducing confusion among investors.

Accordingly, the Commission should reconsider whether the recommended approach is workable, suitable, and consistent with relevant statutory provisions and with the realities of the marketplace. If, however, the Commission decides to pursue its current approach, we respectfully request that it consider the following issues before adopting any final rule.

Summary of ICAA Comments

1. Despite dramatic changes that are occurring in financial services, fundamental differences remain that distinguish core investment advisory functions from core brokerage activities, including the fact that investment advisers owe a strict fiduciary duty to their clients.
2. The ICAA agrees with the Commission that a functional test focusing on the nature of services provided (rather than the form of the broker-dealer's compensation) is appropriate in determining whether and under what circumstances a brokerage account may be excluded from provisions of the Advisers Act.
3. The functional test proposed by the Commission should be modified as follows:

4. The Commission should preserve the fundamental differences between brokerage and advisory services if and when it considers rules under or amendments to section 206(3) of the Advisers Act (prohibiting principal trades by investment advisers absent specific disclosure and client consent).


We commend the Commission for issuing the proposed rule. It has been evident for some time that broker-dealers have been migrating toward asset-based fees. We are convinced that the primary reason for this trend is increased competition in execution services, primarily from the proliferation of electronic communications networks (ECNs) and other Internet-based entities that offer execution services at a fraction of traditional full service brokerage costs. As commissions are being squeezed - and as the number of investors and assets continues to grow - many full service brokers have begun to diversify their products and services by offering on-line trading, asset-based fees, various advisory programs, and other additions to their traditional programs in an effort to respond to competitive forces and to capitalize on the major influx of assets from a new generation of investors.

As the Commission notes in its proposed rule,3 these new brokerage programs involve the receipt by broker-dealers of "special compensation," as set forth in the Advisers Act. Receipt of special compensation has meant - up until the proposed rule was released - that a broker-dealer could not claim an exclusion from provisions of the Advisers Act. The fact that fee-based brokerage programs have proliferated contrary to specific statutory provisions of the Advisers Act is clearly an undesirable regulatory result. There is an obvious need for the Commission to provide explicit guidance to broker-dealers, investment advisers and, most importantly, to investors, as to where the distinguishing lines between brokerage and advisory services will be drawn and how they will be enforced in the future.

The need for explicit guidance is even more compelling when considering the growth of high profile advertising touting the virtues of broker-sponsored fee-based programs and advisory services. During the past several months alone, full service brokers have spent millions of dollars on campaigns designed to attract consumers to their new programs, including commercials that emphasize advisory services and the merits of asset-based compensation. Given the prominence of these efforts, it is incumbent upon the Commission to take prompt and decisive action that will benefit investors by helping them understand the types of services that are available and the differences between brokerage and advisory services.

Fundamental Differences Separate Advisers and Brokers

There are fundamental differences between most investment advisers and most broker-dealers. Broker-dealers execute trades while advisers do not. Broker-dealers typically have custody of client assets while most advisers do not. In street parlance, brokers are the "sell" side while advisers are the "buy" side. Broker-dealers traditionally have employed sales forces compensated primarily by commissions while most advisers have not. Broker-dealers are interconnected to each other and to other financial service providers in ways that many advisers are not and thus present greater risks to investors and the markets when problems arise.4 And, as emphasized in the proposed rule, most broker-dealers do not exercise discretionary authority over client accounts, unlike most SEC-registered investment advisers.

There also are fundamental differences between the laws and regulations governing broker-dealers and investment advisers. Most important from an investor's point of view, investment advisers are subject to a strict fiduciary duty.5 In a 1978 release, the Commission noted that the protections afforded investors under provisions of the Securities Exchange Act of 1934 "may not be so broad as those afforded under the comparable provisions in Section 206 of the Advisers Act" and that such differences "are appropriately related to the obligations of persons required to be registered under the Advisers Act."6 In the same vein, the SEC's 1980 Inspection Manual states that: "An investment adviser is a fiduciary who owes his clients undivided loyalty, and is prohibited from engaging in activity in conflict with the interest of any client."7 Broker-dealers, on the other hand, generally are subject to the standard of suitability in making investment recommendations and are subject to regulation by both the Commission and the National Association of Securities Dealers. Investment advisers are primarily regulated by the Commission (advisers with less than $25 million in assets under management are regulated exclusively by the states). As described in the Commission's 1978 release, the bottom line is that "the Advisers Act provides individuals with certain protections not available under the Exchange Act."8

The ICAA recognizes the leadership role Chairman Levitt has played during the past several years in urging the broker-dealer industry to reform its compensation practices. We commend Chairman Levitt's longstanding efforts to "accelerate efforts to reduce or eliminate conflicts of interest between brokers and their clients."9 The ICAA shares these concerns. Since our organization was founded in 1937, the ICAA has recognized the potential conflicts of interest that may arise when commissions are charged. Since 1937, our recommended standards have always emphasized the importance of fee-based compensation in rendering advisory services.10 Thus, we understand the benefits to investors of fee-based compensation. While such compensation eliminates some conflicts of interest, it also may create new conflicts, which are addressed principally by the Advisers Act (not the Exchange Act).11 Although fee-based compensation reduces the incentive to churn an account to generate commissions, it is not in and of itself an inherent guarantee that such fees are reasonable or that other services connected with such a fee are in the client's best interests.12

It is understandable that many full service brokers are anxious for the Commission to adopt the proposed rule in order to ensure that their fee-based accounts are not "re-designated" as advisory accounts. Stated differently, the brokerage community would not have urged the Commission to issue the proposed rule were it not for the fact that there are substantial differences in the manner in which investment advisers and broker-dealers are regulated.

There are at least four aspects of the Advisers Act and accompanying laws governing the conduct of investment advisers that are significantly different from those applicable to broker-dealers. First, as noted above, advisers owe a strict fiduciary duty to each of their clients that goes well beyond any similar legal obligation of broker-dealers.

Second, section 206(3) of the Advisers Act prohibits an investment adviser from selling or purchasing any security to or from a client when acting as a principal for its own account, unless each such transaction is disclosed in writing to the client and the client consents to it.13 Many broker-dealers have an existing inventory of securities and thus they have a natural incentive to buy and sell such securities to and from clients on a principal basis.

Third, the Advisers Act requires investment advisers to make certain disclosures that differ substantially in timing and content from current disclosures required by broker-dealers. These include requirements to deliver an informational brochure promptly and to make disclosures about an investment adviser's potential conflicts of interests, other business and activities and affiliations, disciplinary history, employees' educational and professional background, and, in some cases, financial condition.14

Finally, whether or not desirable from a policy perspective, the Advisers Act flatly prohibits testimonials and past specific recommendations in advertising. Brokers frequently employ testimonials in advertising and such use appears to be increasing.

In issuing the proposed rule, we are confident the Commission has no intention of diluting the unique investor protections or specific statutory provisions of the Advisers Act. We also are confident the Commission does not wish to allow broker-dealers to avoid such protections or provisions when performing advisory services that go beyond those described in section 202(a)(11)(C) of the Advisers Act. Finally, we are confident the Commission does not want to open the door and allow broker-dealers that claim an exclusion from the Advisers Act to market advisory services in a manner that may mislead investors.

The Commission's Proposed Functional Test Should Be Modified

The proposed rule purports to adopt a functional test that focuses on the nature of services provided rather than the form of compensation.15 Under the proposed test, the Commission would first examine whether advisory services are provided on a discretionary basis instead of looking to the form of compensation. A broker-dealer would be able to claim an exclusion from the Advisers Act as long as: (1) the advice is provided on a non-discretionary basis; (2) the advice is solely incidental to the brokerage services; and (3) the broker-dealer discloses to its customers that their accounts are brokerage accounts.

We agree that a functional test that focuses on the nature of services provided should be employed in making the determination as to whether a brokerage account falls within the provisions of the Advisers Act. Functional regulation is consistent with the SEC's position in the recent financial services modernization debate16 and is consistent with the SEC's treatment of wrap fee accounts in the release.17 We also agree that examining whether advisory services are provided on a non-discretionary or discretionary basis is an important factor to consider in determining whether an account is subject to the Advisers Act.18 However, we believe the proposed rule needs to be modified in certain respects to ensure that investors are not misled or confused.

Commission-Based Discretionary Accounts

Perhaps the most glaring inconsistency in the proposed rule is the statement that discretionary brokerage accounts that charge commissions will be treated differently from discretionary brokerage accounts that charge fee-based compensation.19 At a minimum, if the Commission adopts a functional test that replaces the form of compensation with the type of discretion exercised over the account, the rule should be applied consistently.20 Providing an exception for discretionary commission-paying brokerage accounts from the exclusion for broker-dealers that charge asset-based fees for discretionary advisory services is confusing and unwarranted. No rationale is suggested in the proposed rule for making such an exception. In light of the fact that the Commission is proposing to overturn 60 years of history by essentially eliminating the concept of "special compensation" from the law, we do not believe that providing an exception for discretionary commission-paying accounts can be justified. To permit such a distinction trivializes the substantial services provided by investment advisers to discretionary accounts - services that should not vary when commissions are charged. Further, as discussed below, discretionary accounts by definition cannot be "solely incidental" to execution services. We respectfully suggest that the Commission assess the proposed exception to the exclusion from the viewpoint of an investor and strongly urge the Commission to remove this inconsistent and unnecessary anomaly from the proposed rule.

The "Solely Incidental" Prong of the Test

We also urge the Commission to take this opportunity to provide better guidance as to what "solely incidental" means in section 202(a)(11)(C) of the Advisers Act. Our review of no-action letters and other SEC releases on the subject indicates there is little meaningful guidance on the subject of what "solely incidental" means. The plain meaning of the term is clear - activities that are a minor part of the broker's business. The inclusion of the word "solely" further clarifies Congress' intent and underscores the conclusion that a broker-dealer could rely on this part of the law if its advisory services are only a relatively unimportant or insignificant part of its business.

We believe that a brokerage account that receives discretionary services is by definition precluded from being an account that may claim an exclusion under the Advisers Act under the "solely incidental" test. When a broker-dealer has discretionary authority over an account, it is difficult to argue that such advisory services are merely "incidental" to that account. A broker-dealer with discretionary authority has the ability to pick and choose securities to buy and sell on behalf of an account without obtaining the investor's consent. Discretionary authority represents a highly intensive form of rendering investment advisory services and thus cannot be characterized as something that is simply an "incidental" consideration for an account or an investor.

Advertising Requirements

Finally, we strongly urge that the rule prohibit a broker-dealer from marketing accounts based on the advisory services provided if the broker-dealer also claims an exclusion from the Advisers Act under section 202(a)(11)(C).21 The need for such a prohibition is clear - to protect investors from being misled. In the proposed rule, the Commission notes that broker-dealers offering fee-based advisory services have heavily marketed them and that this "raises troubling questions as to whether the advisory services are not (or will be perceived by investors not to be) incidental to the brokerage services."22 If the fee-based advisory services are "solely incidental" within the meaning of the statute, the prohibition on marketing such accounts could not - by definition - have a significant impact on the broker-dealer's business.23

More importantly, such a prohibition is necessary for the protection of investors. It is patently misleading for a broker-dealer to market its advisory services when in fact such services are only an insignificant part of the broker's business and the broker is claiming an exclusion from protections provided to investors under the Advisers Act. An investor who responds to such marketing materials would have a reasonable expectation that the entity marketing such services is subject to the protections afforded investors under the Advisers Act.24

If the Commission nevertheless pursues the proposed disclosure alternative, it must require more meaningful and appropriate disclosure. The rule should require broker-dealers to include prominent plain English disclosures in any marketing efforts to apprise investors that the advisory services being offered are not subject to protections and provisions of the Advisers Act, including the fiduciary responsibility that a registered investment adviser owes to its clients. While the Commission may determine the appropriateness of any such disclosure on a case-by-case basis,25 we suggest that a prominent disclosure along the lines of the following could be appropriate in marketing materials relating to advisory services provided by a broker-dealer that claims an exclusion from the Advisers Act:26
[Name of broker-dealer] is a registered broker-dealer. Our primary business is executing securities transactions. The accounts and services described are not subject to the Investment Advisers Act of 1940 (Advisers Act) and Advisers Act rules because we believe that any advisory services we provide are solely incidental to our primary business as a broker-dealer. As such, [name of broker-dealer] is not required to comply with investor protections provided under the Advisers Act, including the fiduciary responsibility an investment adviser owes to its clients.

Absent such prominent disclosure, investors likely will be misled as to the legal status of the broker-dealer and its obligations under law. The recommended disclosure will provide investors with relevant and accurate information regarding the advisory services offered by the broker-dealer and will enable investors to make a better and more informed decision about such services.

The ICAA Agrees with the Proposed Assets Under Management Test

The Commission proposes to amend Schedule I of Form ADV to confirm that broker-dealers may include in their calculation of assets under management only the value of accounts over which they exercise investment discretion. The ICAA concurs with this approach. Accounts that brokers claim do not meet the functional definition of advisory accounts cannot be deemed to receive "continuous and regular supervisory or management services" for purposes of investment adviser registration requirements.

Changes to the Principal Trading Prohibition Must Be Considered Carefully

As noted above, one of the primary differences between broker-dealers and investment advisers is the restriction on principal trading that applies to investment advisers.27 No comparable provision exists in the Exchange Act or other laws or regulations governing broker-dealers. Congress included section 206(3) in the original Advisers Act due to its concerns about potential overreaching by advisers at the expense of their clients. As such, section 206(3) represents one of the major differences between advisers and broker-dealers and the laws and regulations governing each.

The broker-dealer industry clearly supports efforts to revise the current prohibition. For example, legislative changes were submitted to the Congress last year by the broker-dealer community that, among other things, would amend section 206(3) of the Advisers Act to allow principal trades and agency cross transactions by an investment adviser under much broader circumstances than the law currently allows.

Earlier this year, Chairman Levitt stated that the Commission will consider changes to the rules under section 206(3):

Under the Advisers Act, an investment adviser must obtain the client's consent before selling him or her securities out of the inventory of an affiliated broker-dealer. But getting the explicit consent to do so can delay a transaction unreasonably. Many traditional brokerages do business over the phone and it can be quite cumbersome to secure timely consent. So, transactions that could have been good for the client and the firm may never take place because people just don't want to bother.

Given the changing structure of our markets and the corollary effects it is having on our business, I believe this is the right time to consider whether it might be appropriate to provide an exemption from the restrictions on principal trading. While we want to open new opportunities to firms and their customers, there are real risks to allowing principal trading in certain situations - such as in illiquid securities or large, market-moving orders where it is very difficult to know whether the client paid a fair price. While we want to make it easier for firms to get paid for their advice as well as their executions, we will not simply exchange one potential conflict of interest for another.

The Division of Investment Management will develop amendments to the rule that strike a balance between these two concerns. I believe we can do this without sacrificing the interests of the profession or investors.28

The SEC's recently published semi-annual regulatory agenda indicates that a rulemaking on this matter will be issued in the very near future.29

The ICAA obviously cannot anticipate what the Commission may propose in this area, but will review any such rulemaking carefully, if and when it is issued, and will respond accordingly. However, the possibility of the SEC granting a new exemption under section 206(3) - when combined with the proposed rule that gives broker-dealers increased latitude to avoid the protections of the Advisers Act - raises concerns of a "slippery slope" whereby the statutory distinctions between brokerage activities and advisory services are eroded - or even eliminated - by a series of rulings or actions by the Commission.

We trust the Commission will consider the long-term and cumulative implications of these and related issues to ensure that investor protections of the Advisers Act are preserved and that such protections will not be circumvented by broker-dealers or other financial service providers that offer, market, or provide investment advisory services.


The ICAA commends the Commission for considering these important issues. The trend toward asset-based fees for advisory services by broker-dealers clearly conflicts with existing statutory provisions and interpretations thereof and this conflict needs to be addressed and resolved. We believe the interests of investors and of the regulated community will best be served by a functional test that focuses on the nature of services provided and/or marketed, while recognizing and preserving the fundamental differences between brokerage activities and advisory services.

While discretion is an important consideration in making this determination, we believe, at a minimum, that the proposed rule requires the following modifications: (a) the rule should be applied consistently (i.e., discretionary brokerage accounts, whatever the form of compensation, should be subject to the protections of the Advisers Act); (b) the rule should clarify that an account that receives discretionary advisory services is by definition an advisory account that is not "solely incidental" to a broker-dealer's business and thus cannot enjoy an exclusion from the Advisers Act; and (c) the rule should prohibit broker-dealers from marketing advisory services that are "solely incidental."

The Commission has recognized that certain provisions of the Advisers Act provide unique protections to investors. In fashioning a rule that will have profound and lasting consequences on whether these investor protections are applied - or avoided - we trust the Commission will give appropriate weight to statutory provisions that define the fundamental distinctions between broker-dealers and investment advisers.

We would be pleased to work with the Commission's staff in drafting language to modify appropriately the proposed rule. Please do not hesitate to contact us if we may provide additional information or clarification to the Commission regarding any of these matters.


Executive Director

Cc: The Honorable Arthur Levitt
The Honorable Isaac C. Hunt, Jr.
The Honorable Norman S. Johnson
The Honorable Paul R. Carey
The Honorable Laura Unger

Paul F. Roye, Esq.


1 The ICAA is a not-for-profit association that exclusively represents the interests of SEC-registered investment advisers. Founded in 1937, the Association's membership today consists of more than 250 investment advisory firms that collectively manage in excess of $2 trillion for a wide variety of institutional and individual clients. For additional information, please consult our web site at www.icaa.org

2 Certain Broker-Dealers Deemed Not To Be Investment Advisers, Release Nos. 34-42099; IA-1845, November 4, 1999 (Release).

3 Release, p. 7: "Fee-based compensation may constitute special compensation under the Act because it involves the receipt by a broker of compensation other than traditional brokerage commissions."

4 The Commission recognized this fact in its treatment of Year 2000 issues. "Year 2000 problems could have negative repercussions throughout the world's financial systems because of the extensive interrelationship and information sharing between U.S. broker-dealers and foreign financial firms and markets." Reports To Be Made By Certain Brokers and Dealers, Rel. No. 34-39724 (March 5, 1998).

5 See SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963); In re Arlen Hughes, Exchange Act Release No. 4048 (February 18, 1948).

6 Final Extension of Temporary Exemption from the Investment Advisers Act for Certain Brokers and Dealers, Investment Advisers Act of 1940 Rel. No. 626; Securities Exchange Act of 1934 Rel. No. 14714 (April 27, 1978). The release also notes that "[a]nother reason some broker-dealers have given for desiring an exemption from the Advisers Act is their belief that an investment adviser, as such, may be held to have higher duties to his clients than does a broker or dealer to his customers."

7 Regulation of Investment Advisers, Lemke and Lins, App. F7 at 23 (1999).

8 Id., note 6.

9 "The State of the Brokerage Profession," Remarks by Arthur Levitt to the Securities Industry Association (April 20, 1998).

10 The ICAA's standards regarding compensation have remained virtually unchanged for more than 60 years. In 1937, Section III of the ICAA's Code of Professional Practice provided that: "Compensation of an investment counsel firm should consist exclusively of direct charges to clients for services rendered, and should not be contingent upon profits, upon the number or value of transactions executed, nor upon the maintenance of any minimum income." Today, Section IV of the ICAA's Standards of Practice provides that: "Compensation of a member firm for investment advisory services should consist exclusively of direct charges to clients for services rendered and should not be contingent upon the number or value of transactions executed."

11 For example, the Advisers Act applies restrictions to aspects of asset-based compensation that may pose certain conflicts. See, e.g., Section 205 of the Advisers Act.

12 See, e.g., "Merrill: Schwab jab a shot in the dark," Investment News, p.1 (November 8, 1999).

13 Many observers believe that the disclosure and consent requirements of section 206(3) operate as a de facto prohibition on so-called principal transactions by investment advisers.

14 See Release, fn. 6.

15 "The proposed rule makes the nature of services provided, rather than the form of compensation, the primary factor in determining whether the Adviser Act applies." SEC Press Release No. 99-147 (November 5, 1999).

16 See, e.g., Testimony of Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, Concerning Financial Modernization and H.R. 10, the Financial Services Competition Act of 1997, before the House Committee on Commerce, Subcommittee on Financial and Hazardous Materials (July 17, 1997) ("For more than a decade, the Commission has urged Congress to adopt a system of functional regulation for all participants in the securities markets. The Commission believes that the same rules should apply to the same activities in the financial marketplace - particularly when the rules are designed to protect investors. The Commission continues strongly to support the principle of functional regulation.").

17 Release, p. 12.

18 Advisory services plainly encompass far more than managing discretionary accounts, as reflected in the SEC's and states' definitions of "investment adviser" and in the SEC's Schedule I description of "continuous and regular supervisory or management services." We recognize, however, that the concept of discretion has some bright line utility as a functional test for the purpose of deciding whether accounts serviced by brokers are subject to the Advisers Act.

19 Release, p. 10. "Under the statute, however, discretionary accounts from which a broker-dealer does not receive special compensation, e.g., accounts that pay commissions, would still be treated as brokerage accounts not subject to the [Advisers] Act. In this respect, a regulatory distinction would continue to be drawn based solely on the pricing of an advisory service." (emphasis added)

20 Interestingly, ERISA employs a functional test for determining whether authority can be delegated to a "fiduciary." A "fiduciary" must have discretionary control and, to achieve a full delegation, the plan sponsor must have written acknowledgement from the adviser that it is an "investment manager" and a "fiduciary." See sections 321, 402, and 405 of ERISA.

21 Release, p. 11 ("Comment is requested as to whether, instead of the proposed disclosure, we should preclude brokers from relying on the rule if they market these accounts in such a way as to suggest they are advisory accounts").

22 Release, p. 11.

23 This problem also manifests itself in enforcement; for example, for how many seconds will the SEC require a disclaimer to appear on a television screen to deem it sufficiently "prominent."

24 See Wall Street Journal, pp. B2-B3 (December 15, 1999). On one side of the two-page advertisement is the following quotation and citation: "For some investors, particularly those with large or complex portfolios who want on-going investment management, the services of a fee-compensated financial advisor may be appropriate. - Leading Discount Broker's Investment Tip #3." On the other page, the word "Amen" appears, followed by the broker-dealer's name, telephone number, and Internet address. We think it is reasonable to conclude that an investor responding to such an advertisement is seeking ongoing and continuous fee-based portfolio management services, not brokerage services.

25 The relative prominence of the services advertised should be an important factor in assessing disclosure.

26 Appropriate disclosure also should be included in any contracts or other written agreements pertaining to advisory services provided by a broker-dealer that claims an exclusion under section 202(a)(11)(C) of the Advisers Act.

27 Section 206(3) of the Advisers Act provides that: "It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph (3) shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transactions."

28 Remarks Before the Securities Industry Association's Legal and Compliance Seminar (April 13, 1999)(emphasis added).

29 Semi-Annual Regulatory Agenda, 64 Fed.Reg. at 65512 (November 22, 1999). "The staff of the Division of Investment Management is considering recommending that the Commission revise the conditions under which investment advisers may enter into principal transactions with their clients."